Those Meddlesome Banks

The American government is notably trying to help Chrysler through a difficult situation (for better or worse). This involves attempts to get concessions from many of the automaker's stakeholders, including labor and suppliers. And, of course, creditors. Unfortunately, they're not playing ball. Having offered Chrysler's creditors 15 cents on the dollar, the government found itself with an aggressive response -- a mere 35% write-down and equity in the company, among other things. Felix writes:

JP Morgan, Citigroup, Goldman Sachs, and Morgan Stanley between them hold $4.3 billion of the $6.9 billion in debt, and are ultimately calling the shots. They're saying that they're perfectly happy to see Chrysler descend into a chaotic and destructive liquidation, because they'll still end up with more money that way than they would if they accepted the government's offer.

I daresay they're narrowly right on that front, since the government's injection of TARP funds into the automakers is a done deal and the banks would essentially be taking a large part of that money for themselves, rather than putting it towards supporting the Detroit car industry as a going concern.

As Felix says, this is ugly behavior, and indicative of institutions with nothing left to lose, in terms of reputation. Meanwhile, James Kwak riffs on the Chrysler creditor story and adds other examples:

The banks leading the charge over Chrysler: JPMorgan Chase and Citigroup. The banks opposed to cram-downs: Bank of America, JPMorgan Chase and Wells Fargo. The banks blocking credit card protections: American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, and JPMorgan Chase. All or almost all are bailout beneficiaries. But don't blame them: they're just doing what they can to maximize their profits at the expense of the taxpayer, which is perfectly legal (and even ethical, depending on your conception of shareholder rights). Instead, you should be wondering why they are in a position to be maximizing profits at the taxpayer's expense.

Both Felix and Kwak read these scenarios as a case of banks behaving badly, and mucking up other government efforts to help the economy, but I think the actual story is a bit more prosaic. There are losses in the system, and all of this is simply a matter of figuring out who will bear them. Now, maybe the banks can actually afford to take these hits, and they're just playing hardball to boost profits, but if that's the case, the government's gymnastics in trying to generate new capital for the banking system are difficult to understand. In a way, then, it seems like the government ought to spend less time worrying about who is going to shoulder these particular losses, and more time worrying about how to get more money into the system. Everyone seems to agree that new appropriations for the banks will be difficult to impossible to come by. Time to brainstorm some other alternatives, I'd say.

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